Question

Problem 3 (25 points) The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation, Information about each firm is given here: Flannery Stultz 19.05 Price-earnings ratio 9.53 200,000 100,000 Shares outstanding $935,000 $345.000 Earnings Flannery's shareholders will receive one share of Stultz stock for every three shares they hold in Flannery. a. What will the EPS of Stultz be after the merger? What will the PE ratio be if the NPV of the acquisition is zero? (15 points) b. What must Stultz feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover. (10 points)

Answer 1

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2056 1 A e B 9 V. (dx ! ENG 1701 2020 JX26 X v for V JW X Y Z KA KB KC KD KE KF KG - FLANNERY STULTZ NO OF SHARES ISSUED TO FLANNERY SHAREHOLDERS = 100000/3 = 33333.33 EPS AFTER MERGER = EARNINGS OF BOTH FIRMS/ NO OF SHARES OF STULTZ + NO OF SHARES ISSUED TO FLANNERY EPS AFTER MERGER = (345000 + 935000)/(200000 + 33333.33) = 5.48571 EPS AFTER MERGER = 5.49 [ROUNDED TO 2 DECIMALS] IF NPV = ZERO MARKET PRICE OF STULTZ WILL REMAIN UNCHANGED EPS = 935000/200000 = 4.6750 P/E RATIO = PRICE/EPS = PRICE/4.6750 = PRICE = 19.05 19.05 19.05 89.06 (19.05 X 4.6750) P/E AFTER MERGER = P/E AFTER MERGER = P/E AFTER MERGER = PRICE / EPS AFTER MERGER 89.06/5.48571 16.23 (NO INTERMEDIATE ROUNDING IS DONE] NPV real clal merger country allocation amorti LOAN OPTIONS SPLIT VALUE OF SHARE HPR REAL RETURN EPS BEST PLAN CAC HIGH LOW Sheel1 Sheet2 )

2056 1 A e B 9 V. (dx ! ENG 1701 2020 Jx/3 * v for JW V X JY I IZ KA KB I KC KD KE KF KG - THE VALUE OF FLANNERY TO STULTZ MUST BE THE MARKET VALUE OF COMPANY AS THE NPV = 0 VALUE OF FLANNERY = VALUE OF FLANNERY = VALUE OF FLANNERY = EARNINGS X P/E 345000 X 9.53 3287850 THE COST OF ACQUISITION = NO OF SHARES OFFERED TO FLANNERY X PRICE OF AFTER MERGER THE COST OF ACQUISITION = 33333.33 X 89.06 = 2968625.00 NPV = 0= VALUE OF FLANNERY - COST OF ACQUISITION - SYNERGY 3287850 - 2968625 - SYNERGY 319225.00 SYNERGY = THOUGH NPV IS ZERO, BUT DUE TO MERGER, SYNERGY IS CREATED OF 319225 SO MERGER IS BENEFICIAL ... NPV real clal merger country allocation amorti LOAN OPTIONS SPLIT VALUE OF SHARE HPR REAL RETURN EPS BEST PLAN EAC HIGH LOW Sheel1 Sheet2 +